1/25/2008 @ 5:40PM

Growing Up Green

The young stars of venture capital aim to do in alternative energy what their bosses once did in computing.

This trio could get hired anywhere. Aileen Lee was president of her section at Harvard Business School. Trae Vassallo learned to program when she was 7 and at 28 cofounded a wireless e-mail company that
Motorola
bought for $550 million. Samir Kaul led the effort to sequence the genome of the arabidopsis plant and then built three life sciences companies from scratch. He’s only 33.

These three are among venture capital’s new guard. Like their predecessors, they’re smart, driven to win and inclined to gravitate to the biggest opportunity they can find. Ten years ago it was software and telecom. Two years ago it was the Web. Now the fad is all things green: renewable fuels, electric cars, smart power grids, clean coal. In 2007 venture investors plowed $2.2 billion into green tech in the U.S., six times the amount they invested in it in 2002.

Lee, 38, and Vassallo, 35, are partners at Kleiner Perkins Caufield & Byers, which has earmarked a third of its $1 billion under management for green technology. A dozen young Kleiner partners revolve around their mentor, L. John Doerr, who this year tops our Midas List of tech’s top 100 dealmakers. Stopping global warming, says Doerr, “is the largest economic opportunity of the 21st century, and a moral imperative.”

Samir Kaul is the right-hand man of Vinod Khosla, a former number one Midas lister (now number 70) who left Kleiner four years ago to set up his own shop, in large part to invest in things that environmentalists love. Khosla has so far invested an estimated $300 million of his $1.5 billion wealth in 35 green companies. Also big in green tech are Draper Fisher Jurvetson, Nth Power, Technology Partners and Mohr Davidow Ventures. Draper has put $143 million into 24 deals in three countries. Credit Suisse banker Bryce Lee broke onto the Midas List for the first time this year at number 19 with big returns on Suntech Power and First Solar. Lee and another first-time Midas Lister, Adam Grosser (number 91), also scored with EnerNoc, a company that remotely controls power consumption at factories and retail stores.

Some of the eco-money is chasing science fiction. “One company planned to convert the ocean into a carbon-eating soup,” says Michael Goguen of Sequoia Capital. Some of it is late to the party and being deployed at insane valuations. First Solar, a huge success for the VCs who got in early, now trades at 40 times sales. David Dreessen of Battery Ventures won’t even invest in a second or third equity round of green-tech deals because the valuations have gotten so stretched. His firm has even gone contrarian by helping launch a $415 million “dirty” fund called SB Energy that will invest in businesses that suck oil out of rock or sand.

Kaul sees plenty wrong with the current frenzy over green tech. “We’ve looked at 50 solar companies,” says Kaul. “They all have crazy valuations. Solar, biodiesel and wind are played out. People talk about biodiesel like palm oil, but it isn’t consistent and it doesn’t scale. We haven’t invested in any of it.”

But for all the froth and posturing, the opportunity in alternative energy solutions is too huge to pass up. The total market value of alternative energy and green-tech companies trading on the U.S. markets today is a little over $60 billion, says Shez Bandukwala at ThinkEquity Partners (although four firms make up two-thirds of that sum). Spending to meet global energy demand will exceed $15 trillion through 2030, dwarfing the capital deployed in the global electronics industry. Doerr is teaching a new generation of VCs how to do what he does best: find and nurture young companies that have the potential for multibillion-dollar returns.

In late 2001 Aileen Lee and Doerr flew to Tucson to meet K.R. Sridhar, an aerospace professor at the University of Arizona who’d come up with a solid-oxide fuel cell that could power and heat a home at half of the co2 production of a normal home. Lee did six months of research and background checks on Sridhar’s group. She can tell you in her sleep the difference between a molten carbonate and a hydrogen fuel cell. In June 2002 the firm invested in the company, now called Bloom Energy. It has since raised $150 million. Lee also brought to the firm green deals such as Lilliputian Systems, which makes a microfuel cell, and Miasolé, which is making thin solar panels that can be rolled out on rooftops. “Aileen is a fast learner,” says Doerr.

Trae Vassallo entered Doerr’s circle of protégés when she joined Kleiner in 2002. Vassallo may not be as operationally savvy as Lee but, says Doerr, her strengths are “understanding and modeling the physics of geographic strata or an automobile engine.” She also took to heart Doerr’s tenet that a VC’s business is accruing relationship capital, so she has spent the last several years chatting up chemists and engineers at trade shows, trolling university labs, and flying to Iceland and Australia to meet geothermal and solar experts.

One person Vassallo kept meeting was Susan Petty, a veteran geothermal engineer and coauthor of an influential MIT paper on the subject. Vassallo invited Petty to dinner after hearing her speak on a panel at Stanford University a year ago. “If you could start any company,” she asked, in typical Kleiner pitch mode, “what would it be? Who would be on your dream team?” Together they tracked down experts in oil and gas extraction and geothermal turbines. Kleiner Perkins and Khosla seeded the company, dubbed Altarock Energy, later that year. So far it has raised $4 million. Vassallo also led Kleiner’s estimated $10 million investment in Fisker Automotive, which plans to produce an $80,000 battery-powered luxury sports car by 2009. The plug-in hybrid will go 50 miles before needing to draw from its gas tank.

Samir Kaul is managing 35 green-tech startups at Khosla Ventures. He spent six months last year shuttling between Silicon Valley and a Denver junkyard, overseeing an outfit called Range Fuels that tried making fuel from hog waste and sewage until it switched to wood chips and branches. In March 2006 he invested in Mascoma, a firm that is genetically manipulating yeast and the clostridium bacterium to come up with an enzyme to convert plant sugars into fuel. Kaul, who’s already built one firm that’s a leader in the field of synthetic biology, is pressing Mascoma’s scientists to do more cut-and-paste gene tests simultaneously.

Mascoma has raised $120 million in debt, equity and state grants but may blow through all of it without ever delivering economically viable ethanol. Because he uses mostly his own money, Khosla says he’s freer to try more out-there ideas: “I regularly fund science experiments.”

Khosla has backed people creating an eco-friendly cement, a filterless ocean desalination method and a still-secret engine with an efficiency very close to 100%. “Another one is so crazy that I just assume it’s going to fail,” he says.

Says Doerr: “Training a venture capitalist can be costly; I’d guess up to $30 million of losses. It’s like crashing an f-16. But you can only lose one times your money. You can make many times, hundreds of times your money, by helping great entrepreneurs build global, durable companies.”